Mortgage-Rate Surge Puts Dent in Refinancings

The recent jump in mortgage rates threatens to put the kibosh on the flood of refinancings that have lined banks' pockets and freed up money for consumer spending over the past four years.

The average 30-year fixed mortgage rate soared to 4.15 percent, a 14-month high, during the week ended June 6, according to the Mortgage Bankers Association (MBA). Even after a rebound by the bond market, the 30-year mortgage rate stood at 4.02 percent Friday, according to Bankrate.com.

Lenders expected that the number of refinancings would gradually ease, but "what wasn't anticipated was that this move in rates would happen so quickly," Bose George, a mortgage-finance company analyst with Keefe, Bruyette & Woods, told The Wall Street Journal.

Banks have recently earned record profits on their refinancings.

Like all other financial markets, the mortgage market is trying to figure out when the Federal Reserve will taper its quantitative easing (QE) program.

"Every speech and statement [from Fed officials] will have the potential to move rates," Michael Fratantoni, vice president of research for the MBA, told The Journal.

Meanwhile, the fact that the Fed owns $1.2 trillion of mortgage-backed securities through its QE gives the bond market protection from a potential sharp drop, bond dealers told Bloomberg.

A sudden spike in Treasury yields can spiral as investors sell Treasurys to protect against mortgage-debt losses — what's known as convexity hedging.

But thanks to the Fed's massive holdings, "the actual convexity hedging flows will be less when rates rise this time than it was in the past," Dominic Konstam, global head of interest-rate research at Deutsche Bank, told Bloomberg.